Volatility, Wall Street and Real Estate

avatarthumbnail.jpgOver the past couple of weeks, I’ve received variations of the same question from several people. Roughly restated, it’s along the lines of “now that Wall Street has melted down and the credit markets are freezing, how far have prices come down in Phoenix?”

The answer – they haven’t, no more so than the decline of the past several months – may come as a surprise to some but probably shouldn’t. With the exception of one 9- to 11-month period in 2005 (you can pick your own start and end date, but that works for the Phoenix real estate market), real estate simply lacks the volatility that you see in many other markets.

Taking a closer look at 2005, the increases that took place happened over a matter of weeks, not days. Similarly, the decline back to pre-run up pricing has taken two-plus years to play out, not just a handful of days. Even as the decline has accelerated this year with the influx of bank-owned homes, you’re not seeing the kind of wild fluctuations that have struck Wall Street again and again over the past couple of weeks.

This is one of the reasons why, historically, real estate has been an attractive investment vehicle. When investors are spooked out of the stock market and seek a flight to quality, that generally denotes a move into less volatile investments that hold an inherent value in and of themselves. Gold is one. Real estate, for those who paid attention to the markets pre-2005, was viewed as another.

Flight to Quality Doesn’t Mean Risk Free

I’ve never used the phrase “real estate only goes up.” Because, as we’ve seen, it’s just not true. Just because real estate historically is a flight to quality-type investment does not mean values can’t rise and fall like other investments.  But unlike stocks, which can turn to worthless paper if the issuing companies fail, real estate does not revert to a value of zero (barring an errant nuclear warhead) just as gold (theoretically) never will be worthless.

When I’ve made the argument in the past, it was countered by those who said real estate can go to zero because it can be worth less than what someone paid. It’s important to realize I’m not discussing a cost basis. I’m talking about the actual value. And there always will be some value in land. End of story.

To properly view the investment worth of real estate, you need to have a memory longer than just the past four years. There always have been ups and downs in the real estate market – never quite as up or down in the past – but ups and downs nevertheless.

One of the statistics I find most interesting is that if you look at any 10-year period in the real estate markets, the value at the end of the 10 years is higher than it was at the start of the 10 years. For instance, for that not to be true now, current home values would need to be lower than they were in 1998.

Could the ten-year periods beginning in 2004 and 2005 be the exception? We’ll know in another six and seven years.

Which brings up the one aspect of the above statistic that I tend to like most – it requires a somewhat longer-term view of real estate. And that’s truly as it should be (and should have been.)

Real estate is not intended to be a flippable investment. It became that through the perfect storm of limited supply and high demand fueled by too-easy money. But the short hold times – months or weeks – were not consistent with real estate’s usual investment time frame of years.

What I’m Not Trying to Say

This post is not an argument that everyone should be invested in real estate. At no point have I said (or will I say) that there may not be short-term pain for those looking to enter the market now with the intention of holding property for a number of years. Given all that is happening, there’s a likelihood of a retreat in value before a gain is seen.

But what I am trying to say is if we’re able to step back from the hysteria of the last few years and look at the historical models, real estate has tended to be a safer investment than many others. And as such, when you see the Dow Jones Industrial Average gyrating 20% down one week, up 10% one day, etc. … those fluctuations aren’t likely to be reflected in the housing market because we’re talking about two very, very different animals.

I’ve been trying in vain to find Jeff Brown’s post detailing why he’ll take his lower return on real estate over a higher return on Wall Street and I’m failing. But I did find this recent gem that discusses what would have happened to your money in a variety of investment scenarios. All Jeff does is add zeroes to the back end of people’s investments, so it might be worth the read.

Perspective Please

It’s difficult to accept in this era of the 24-hour hews cycle, but there are many things that are not intended to be viewed on a minute-by-minute basis. Real estate is one of them.

Yesterday I wrote about Captain Morgan, the other beagle in the Dalton household. I’m not suggesting it’s prudent to spend most of your day either sleeping, eating or barking at people walking past the back fence. But that plan is no less prudent than clicking refresh minute by minute to see where your 401k is, or running comps daily to check the value of a home you have no intentions of selling anytime soon.

Real estate is intended to be a long-term vehicle. View it as such, step back until you have that perspective, and things like a lack of a sharp decline in light of Wall Street’s meltdown will make a bit more sense.

[tags]Phoenix real estate[/tags]

Jonathan Dalton

Jonathan Dalton is a 40-plus-year resident of the Valley and has been helping folks buy and sell homes since 2004. He can be reached at 602-502-9693 or info at allphoenixrealestate.com.


  • BawldGuy 9 years ago

    Smart folks view both arenas through long term lenses. The core difference is what the post clearly points out — real estate will always have value. Historically RE has always, without exception, recovered lost value due to economic downturns.

    This is hardly true of stocks in firms no longer in existence. You can take those certificates and start Saturday’s BBQ with ’em, ‘cuz that’s about what they’re worth at that point.

    And for those geniuses who insist, in public no less, that leverage can be made as prudent on Wall Street as in real estate? Vons is taking applications.

  • Charleston real estate blog 9 years ago

    My personal opinion, you don’t sell real estate or stocks in this market, you buy.

    “Be fearful when others are greedy and be greedy when others are fearful.” Warren Buffet

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